California Drought: Food Prices and Consumers

Overview

The impact of the California drought on food prices depends on its severity, and in turn its impact on yields, and the acreage and planting decisions of California farmers. California accounts for a large share of U.S. production of many fruits and vegetables. With respect to these crops, the immediate concern is the cost and availability of groundwater. Owing to higher production costs, insufficient water, or both, producers may opt to reduce total acreage, driving up prices not just this year but for years to come. At this point we have started to see this happen, but it is too soon to discuss the extent to which this is likely to happen throughout California.

Retail fruit and vegetables share a much stronger relationship with farm commodity prices than many other foods. Looking at ERS’s Retail Food Dollar series, for example, farm and agribusiness represent 40.2 cents of every dollar spent on fresh fruit (fig. 1), but just 7.4 cents of every dollar spent on cereal products, which undergo more processing (fig. 2). This, as well as seasonality, helps to explain why the fresh fruit and fresh vegetable Consumer Price Indexes (CPIs) are among the most volatile that ERS analyzes and forecasts. Fresh produce undergoes relatively little processing, packaging, and advertising. It is also highly perishable, meaning that storage has little-to-no impact on the transmission of prices from the farm to retail level. As a result, any increases in fruit and vegetable farm prices should generally show up on supermarket shelves—and in the CPI—within approximately 1 month. However, even for fresh produce, retail inflation is considerably smaller than the inflation seen at the farm level for the same fruits and vegetables. Commodity price swings have a muted effect at the retail level, as may other factors make up the price consumers pay at the supermarket. Retail prices are also affected by fuel prices, labor wages, agribusiness contracting, imports, and other factors of production.

Figure 1

 

Figure 2

While droughts in California are generally associated with higher retail prices for produce (fig. 3), the effects do not occur immediately. Price increases associated with a drought are lagged due to the time it takes for weather conditions and planting decisions to alter crop production. For example, a head of lettuce takes roughly 2.5 to 3 months to reach maturity. In 2005, following five years of drought, retail fruit prices rose 3.7 percent and retail vegetable prices increased 4 percent. Prices continued to rise in 2006, one year after drought conditions began to improve. However, it is important to keep in mind that many factors affect retail produce prices. Despite drought conditions, prices for fresh produce fell in 2009, as the 2007-09 recession reduced foreign and domestic demand for many retail food products.

Figure 3

Increases in the retail prices for fresh fruits and vegetables in 2014 were primarily driven by an increase in the price for citrus fruit. However, rising citrus prices were reflective of two factors unrelated to the California drought. The first was the ongoing greening disease of Florida citrus commodities, which has damaged or destroyed substantial portions of the orange crop. The second was the December 2013 freeze in southern California that reduced the U.S. fresh orange crop. In 2014 fresh vegetable prices deflated 1.3 percent, despite the drought. Prices for fresh vegetables fell in 2014 after seeing higher than average price increases in 2013.

Despite drought conditions in California, the strength of the U.S. dollar and lower oil prices had a mitigating effect on fresh fruit and vegetable prices in 2015. In 2015, fresh fruit prices fell 2.2 percent below 2014 levels. Fresh vegetable prices did increase, rising 1.6 percent over the same time period. However, this is still below the 20-year historical average of 2.7 percent for the category.

California is also a major dairy-producing State. The drought has the potential to increase the price and decrease the availability of alfalfa, the primary feed for dairy cattle, which could drive up fluid milk prices. Increases in the farm price of fluid milk are typically transmitted quickly and efficiently to retail food prices. In fact, the price of fluid milk was seen as one barometer of the magnitude and duration of the impacts of the 2012 drought due to its perishability and strong dependence on commodities used as animal feed. Impacts on other products in the dairy category, including sour cream, cheese, or ice cream, may be delayed significantly following impacts on dairy prices due to processing time and will also be smaller in percentage terms.

Outlook 2016-17

As of August, the outlook for 2016 is for lower-than-average retail food price inflation, with supermarket prices expected to rise between 0.0 and 1.0 percent over 2015 levels. However, depending on its continued severity, the drought in California has the potential to drive prices for fruit, vegetables, dairy, and eggs up further. Retail egg prices, however, are expected to decline 14.0 to 15.0 percent in 2016 as this market recovers from the Highly Pathogenic Avian Influenza (HPAI) outbreak the previous year. In 2015, retail egg prices rose 17.8 percent. In 2017, retail food prices are expected to increase 1.0 to 2.0 percent, at rate still lower than the 20-year historical average of 2.5 percent per year.

California is the largest U.S. producer of many fresh fruits and vegetables. Tables 1 and 2 on the Crop Sectors drought page outline California’s share of U.S. production for each commodity. While California does grow a large percentage of many fresh fruit and vegetables within the United States, portions of the produce we purchase and consume are imported from various foreign markets. For instance, 86 percent of U.S. avocadoes are grown in California, but from 2014 through 2015, 82 percent of the avocadoes we consumed were imported from other countries. For commodities with relatively large proportions of imports, the drought impacts would generally be smaller. For more information on the percent of U.S. imports by crop type, see tables 3, 4, and 5 on the Crop Sectors page.

Prices for fresh fruits declined 0.7 percent from June to July, but were 3.0 percent higher than in July 2015. The month-over-month decrease was partially driven by declining prices for the "other fresh fruits" category (which includes all fruit except apples, citrus, and bananas) which fell 2.5 percent from June to July. Fresh vegetable prices decreased again in July, falling an additional 0.2 percent from June levels, but remain 1.0 percent higher compared with July 2015. Recent fresh vegetable price deflation does not signal that the drought has had no effect on fresh produce prices; for commodities that are grown almost entirely in California and whose supply is not largely supplemented by imports, price increases may have been earlier and higher. Additionally, prices typically decline for fresh fruits and vegetables in the summer months as produce can be grown throughout much of the Unites States, which boosts supply on the U.S. market and decreases the cost of transportation.

Looking at the Producer Price Index for farm-level fresh fruits and vegetables, prices declined 6.4 percent for farm-level fruits and 2.4 percent for farm-level vegetables from June to July - indicating that we could continue to see price decreases at the retail level in coming months. For the year 2016, we expect retail fresh fruit and vegetable prices to rise between 1.0 and 2.0 percent and by an additional 1.0 to 2.0 percent in 2017.

For more information on the ERS food price forecasts, see the Food Price Outlook. For prices of specific items, see the National Retail Report- Fruits and Vegetables published weekly by USDA’s Agricultural Marketing Service.